PriceSmart Beats Expectations (STRONG BUY)

PriceSmart Inc. (PSMT: 24.97 0.00 0.00%) reported fiscal 2010 third quarter results on Friday. The company recorded a strong 38.5% growth in net income to $12.0 million or 40 cents per share from $8.7 million or 29 cents per share in the year-ago quarter. Quarterly earnings easily surpassed the Zacks Consensus Estimate of 34 cents per share, and were primarily driven by higher revenues and improved margins.

During the quarter, PriceSmart’s total revenues grew 13.7% to $348.6 million from $306.5 million in the year-ago period. The company recorded a 13.9% year-over-year growth in net warehouse club sales to $341.2 million as the company benefited from strong demand related to the FIFA World Cup soccer championship. Overall revenue growth was also aided by an 11.9% year-over-year growth in membership income to $5.1 million due to increased membership accounts.

PriceSmart’s warehouse gross margin improved 90 basis points (bps) to 15.5%, primarily driven by lower mark-downs. Warehouse club operating expenses, and general and administrative expenses combined increased 12.2% year-over-year to $40.6 million, mainly due to higher compensation and benefits related costs. However, increased sales and improved gross margin more than offset higher operating expenses. Accordingly, operating income grew 36.5% year-over-year to $18.1 million, while operating margin expanded 90 bps to 5.2%.

PriceSmart ended the quarter with cash and cash equivalents of $55.1 million with a long-term debt-to-capitalization of 15.1%, compared to a cash balance of $39.0 million and a long-term debt-to-capitalization of 10.1% in the prior-year quarter. During the first nine months of the current fiscal year, PriceSmart generated $51.1 million of cash from operations, received $35.5 million from borrowings and deployed $38.2 million towards capital expenditure.

Moving forward, PriceSmart expects to continue benefiting from strong demand in its end markets related to the World Cup. The Zacks Consensus Estimate on the company’s earnings for the year ending August 2010 has moved down a penny over the past month to $1.50 per share. For the next fiscal year, the Zacks Consensus Estimate has reduced 8 cents over the past month to $1.67 per share.

PriceSmart is mainly engaged in the operation of membership shopping warehouses in international markets. The company sells quality merchandise at low prices to its members, and currently operates 27 warehouse clubs in 11 countries and one U.S. territory.

Analysts' Targets
Argus Research	$27
Buy
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